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<i>Dear Workforce</i> What’s The Best Approach To Compensation For Our CEO

October 28, 2001
Q

Dear Workforce:

What guidelines should be used when creating a compensation plan for a CEO ofour start-up company (not a dot-com)? Is there a formula based on revenue?Should we consider a bonus plan?

-- Trying to be fair, Director, Software/Systems, Denver, Colorado.

A Dear Trying to be Fair:

Start-up companies face the same issues that Fortune 500 companies must dealwith when designing CEO packages -- offering competitive compensation that is inline with the CEO's level of responsibilities, company performance, andsatisfaction of board and/or investor expectations. As large companies do whenfactoring in compensation decisions, start-up companies need to be acutely awareof the company's short and long-term direction and how much the company isdependent on the CEO's talents in leading the company to these goals.Compensation decisions should be based the individual's intrinsic value to thecompany, and the cost and ease to the company of replacing that top leadership.

Start-up companies should include elements of CEO compensation that mirror(as much as possible) compensation packages at established companies. The commonelements of executive compensation include salary, bonus, equity participation,supplemental retirement, severance arrangements, and perks.

Recent studies we have done on CEO compensation at startup pre-IPO companiesshow that bonus opportunity is universal to this group of companies. Bonusopportunities at these companies are almost always stated as a percentage ofsalary, and for CEOs of nascent organizations, that opportunity is most oftentargeted between 40 percent and 60 percent of salary. When designing bonusplans, start-ups should pay particular attention to multiple strategic businessgoals -- both corporate and individual. Quantifiable goals can be weighted toreflect goals that are most important to the financial performance of thecompany and qualifiable goals to the performance of the individual. Depending onthe culture of the company, emphasis can be written into a bonus plan toencourage attainment of multiple business strategies. Again, it is mostimportant that the plan reflect the company's business intent.

Equity awards are assuming an ever-greater part of executive compensation.Long and short-term compensation rewards are being made in the form of stockawards, stock options, performance and time-based restricted shares, and phantomunits. Many start-up companies offer CEOs equity ownership percentages after anIPO to attract and retain executive talent during the development stage.Depending on the company, our research shows that post-IPO arrangementstypically can range from 5 percent to 10 percent of company ownership. You'llwant to consider market trends and their implications when determining the mixof your CEO's compensation arrangement.

When designing the compensation plan for your CEO, it is important torecognize that one size does not fit all. You need to create a tailoredstructure that specifically suits your company. As the job of CEO has becomeincreasingly complex, so has the task of determining how to design compensationpackages that will be competitive, have retention value, and at the same time,drive company performance.

SOURCE: Judy Fischer, ManagingDirector, executive compensation advisoryservices, Drake Beam Morin, Alexandria, Va., May 22, 2001.

LEARN MORE: See "HR 101:Compensation"

The information contained in this article is intended to provide usefulinformation on the topic covered, but should not be construed as legal advice ora legal opinion. Also remember that state laws may differ from the federal law.

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